You've probably heard the radio ad that says you can get a mortgage even if you have bad credit. Subprime mortgages are another name for mortgages for people with bad credit.
Subprime
"Subprime" is a term for a borrower who doesn't meet the requirements for a traditional home mortgage. It used to be very hard to get subprime loans, but things changed in the 1990s. Banks started to notice that a lot of people who wanted to borrow money had bad credit or other problems. More borrowers meant more money for the banks, so they started making subprime mortgages and the game was on. Because of these new loans, the number of people who own their own homes in the U.S. is at an all-time high.
Your credit score is one of the most important factors in whether or not you can get a loan. A "FICO" score, named after Fair Isaac and Company, Inc., is used to look at a borrower's credit history. In general, a FICO score of less than 620 is seen as a sign of bad credit. The borrower is then put in a group called "subprime."
Importantly, having a FICO score of less than 620 is not the only way someone can be considered subprime. A history of not borrowing much, a new job, or an expensive home may also be deciding factors. In fact, almost half of the people who take out subprime loans have FICO scores above 620.
When a lender gives out a mortgage, it is making a bet on whether or not the borrower will pay back the loan in full and on time. The lender will give you a better deal the better your credit score, employment history, and other things are. Borrowers with bad credit won't get the best deal, that's a given. Instead, a lender may ask for a bigger down payment and will definitely set a higher interest rate than for "good" borrowers. Borrowers with bad credit may also have to pay points just to get the loan.
In exchange for all of this, you can get a loan to buy a house. One of the best long-term investments in the United States has always been buying a home. People say that Americans don't save enough money, but they do save money by buying homes and building equity in them.
Should you try to get a subprime loan if your credit isn't great or if you have other problems? There is no right answer, so you should talk to an independent mortgage broker about your situation.
